What does the global energy crisis mean for crypto markets?

It cannot be denied that the world is currently facing an unprecedented energy crisis, one that has seriously intensified in the wake of the COVID-19 pandemic so much so that countries around the world – especially across Europe and North America – are witnessing severe shortages and steep. increases in the prices of oil, gas and electricity.

In particular, limited gas supplies, stemming from the ongoing conflict between Russia and Ukraine, have caused the price of essential commodities such as fertilizer to shoot up dramatically. Not only that, but it has also resulted in increased use of coal and other natural resources. Coal consumption in Europe alone rose by 14% last year and is expected to increase by a further 17% by the end of 2022.

To explain the matter further, it’s worth noting that European gas prices are now about 10 times higher than their average level over the past decade, reaching a record high of about $335 per megawatt-hour in late August.

Similarly, the United States Energy Information Administration’s recently published 2022 Winter Fuel Outlook suggests that the average cost of fuel for Americans will increase by a whopping 28% compared to last year, rising to a staggering $931.

With such eye-opening data out in the open, it’s worth delving into the question of how this ongoing energy shortage could potentially affect the crypto sector and whether its negative effects will subside anytime soon.

The experts assess the matter

Matthijs de Vries, founder and CTO of AllianceBlock – a blockchain firm that bridges the gap between decentralized finance (DeFi) and traditional finance – told Cointelegraph that the global economy is in bad shape thanks to a number of factors, including the looming power crisis. recession, rising inflation and rising geopolitical tensions. He added:

“These problems are connected, primarily in the way capital flows in and out of high-impact industries. The worse the macroeconomic climate, the lower the capital (liquidity) flowing in and out of the digital asset industry. This liquidity is what makes the incentive mechanisms of blockchain can continue to work. So, for miners, if there is a lack of liquidity, this means fewer transactions for them to confirm, less fees and reduced incentives.”

Moreover, de Vries believes that rising energy costs could provide further incentives for miners to move towards the validator ecosystem of Ethereum 2.0 which relies on a far more energy efficient proof-of-stake (PoS) mechanism.

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A somewhat similar sentiment is echoed by Yuriy Snigur, CEO of Extrachain – an infrastructure provider for distributed applications, blockchains and decentralized autonomous organizations (DAO) platforms – who believes that the ongoing energy price rise will affect proof-of-work (PoW) blockchains. mostly.

– They are most dependent on the energy sector. In my opinion, the value of a blockchain should not come from pointless burning of energy, which is why PoW is ultimately doomed,” he noted.

Deteriorating macroeconomic climate will hurt crypto in the short term

Nero Jay, founder of crypto YouTube channel Dapp Centre, told Cointelegraph that the challenges witnessed will continue to have an overall negative impact on the crypto market, as a result of which most investors will continue to look at this still nascent sector as being. speculative and risky, at least for the foreseeable future.

However, he noted that the aforementioned challenges could serve as an opportunity for increased crypto adoption, especially as many countries such as Venezuela, Turkey, Argentina, Zimbabwe and Sudan continue to be ravaged by hyperinflation and sanctions, which could bring crypto. assets more benefits and use cases.

Finally, Jay believes that the worsening energy situation could result in increased scrutiny of the mining sector, especially as zero-carbon campaigners will now have more fuel to criticize the space.

“Many are questioning the impact that crypto mining can have on the environment. The good news is that we are already seeing many cryptocurrency projects, including Ethereum, making their blockchain platforms very efficient and based on low carbon emissions,” he said.

Bitcoin’s price and its relationship to the energy market

From the outside looking in, increased energy prices will increase costs for miners, which in turn may force them to sell their held Bitcoin (BTC), thereby pushing prices down. Furthermore, increased production can cause miners to demand higher prices to cover their day-to-day operating costs, and in some cases even force them to shut down operations altogether or sell their equipment.

Also, even if miners continue to go out of business, the total volume of BTC mined will remain the same. However, the block rewards will be distributed among fewer individuals. This suggests that miners who can fend off the bearish pressure induced by rising energy costs stand to make massive profits. Andrew Weiner, vice president of cryptocurrency exchange MEXC, told Cointelegraph:

“Electricity shortages can lead to higher electricity prices, which significantly increases the cost of Bitcoin mining. In the event of a regional long-term power shortage, it will lead to the migration of miners to other jurisdictions where relatively cheap electricity prices provide security and stability.”

Hope still remains for a trend reversal

Weiner said that while the energy crisis could put pressure on Bitcoin’s price, the poor weak state of the global economy could potentially counteract this.

In Weiner’s view, in the current global economic environment, the US Federal Reserve’s monetary policy has had the greatest influence on the cryptocurrency market, adding:

“Starting with the implementation of loose monetary policy by the Federal Reserve in 2020, institutions have digitally transformed their back-offices and accelerated their purchases of Bitcoin. As fiat falls, institutions adjust their strategy to allocate bitcoin as value-preserving assets.

He further noted that the cryptocurrency market, especially Bitcoin, is increasingly correlated with the Nasdaq and S&P 500, while the correlation with energy, oil and electricity will not be significant unless BTC mining is affected by a future global electricity shortage.

Also, the ongoing energy crisis could potentially trigger more government spending programs, resulting in them “printing” more money to get out of trouble. This could potentially result in a loss of confidence in fiat assets and more demand for digital currencies. This trend is not beyond the realm of possibility as it is already being witnessed in several third world nations and may even penetrate certain major economies as well.

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Just a couple of months ago, inflation in the Eurozone rose to a record high of 8.9%, a situation also witnessed in the US, where inflation rose to a forty-year high of 8.5% back in August. And while many individuals continue to be divided on the positive/negative impact of the stimulus packages on the global economy, the fear of increased inflation alone is driving the demand for cryptocurrencies.

Therefore, as we move into a future plagued by potential energy shortages and rising prices, it will be interesting to see how the future of the digital asset market continues to play out, especially as rising geopolitical tensions and deteriorating market conditions continue to make matters worse.